Corporate bond
lastmod 2020-09-22created 2020-09-221 edits
A corporate bond (會社債), or simply bond (社債), is a debt that a stock company incurs by issuing to the general public relatively long-term securities called bonds in order to raise funds. They are issued in large volumes, and bondholders receive interest ahead of dividends to shareholders.
Legal significance
- Stock companies are the issuers of bonds; limited companies cannot issue them. (Commercial Act Article 600(2) and the proviso of Article 604(1))
- Since a bond is a debt of the company, the bondholder is, in relation to the company, a creditor under private law.
- Since a bond takes the form of an issued bond certificate, it differs from borrowings made through a loan certificate or a promissory note.
- A bond is a debt that a stock company raises collectively and in large volumes from the general public. It is a security that promises to pay a fixed interest under contract and to repay the principal at maturity, and accordingly the maturity, the interest to be paid, the principal to be paid at maturity, etc. must be stated.
Types
Classification by interest payment method
- Coupon bond - A bond with coupons. Coupons stating the amount of interest paid each period are attached to the bond, and at each set time a coupon is detached and exchanged for interest.
- Discount bond - A corporate bond issued at the face value minus interest and redeemed at face value at maturity.
Classification by option terms
- Convertible bond (CB: Convertible Bond) - A bond granted the right to convert into new shares of the issuing company. It has the lowest coupon rate among bonds. Exercising the conversion right extinguishes the bond.
- Bond with warrants (BW: Bond with Warrants) - A bond granted the right to subscribe to new shares of the issuing company. Unlike a convertible bond, it is a right to "subscribe" to new shares, so new funds are needed to subscribe. Even after the warrant is exercised, the bond remains, so the bond is retained. The warrant alone can be detached and transferred separately, and these bonds are divided into detachable and non-detachable types.
Classification by early repayment of principal
- Callable bond (Callable Bond) - Corporate bonds are generally bullet bonds that repay the principal in a lump sum at maturity. In contrast, a callable bond can be redeemed whenever the company wants, even before maturity. When interest rates are low, a company can redeem existing corporate bonds and issue new ones at a lower rate to save on interest costs. It has a very high coupon rate and a low price (straight bond value - call option value). Since it is favorable to the company but unfavorable to bondholders, the redemption amount is mostly higher than the face value.
- Putable bond (Putable Bond) - Contrary to a callable bond, the investor can demand early redemption at will. It has a very low coupon rate and a high price (straight bond value + put option value). The right is exercised when market interest rates rise.
Classification by guarantee
- Guaranteed bond - A corporate bond whose repayment is guaranteed by a third party other than the issuer, such as a bank.
- Unguaranteed bond - A corporate bond issued by the issuer on the basis of its own credit. It can be issued only after receiving credit ratings from two or more credit rating agencies, such as Korea Information Service or Korea Investors Service. Almost all bonds issued in South Korea are unguaranteed bonds.